Monday, June 9, 2008

Gas at $4/ Gallon

U.S. gasoline rose to $4 a gallon at the pump for the first time, threatening to further shake the confidence of consumers whose spending makes up two-thirds of the economy.

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``The fact that confidence has gone down as inflation expectations are going up indicates gasoline has been an important driver because it's one of the reasons expectations are rising,'' Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, said.

Consumers are already rattled by falling home values and a weakening job market, prompting them to curb spending and threatening to halt the six-year expansion. Consumer confidence in May fell to a 28-year low, as inflation expectations rose to their highest in more than two decades, according to last month's Reuters/University of Michigan sentiment survey.

There's only so much strain consumers can take. At some point, they will day, "to hell with it" and stop spending. In addition, at some point, prices will start to really impact overall consumer behavior. In fact, price may already be at that level. For example, in their recent announcement of 4 plant closings, GM stated consumers were walking away from big SUVs in droves and moving into smaller, more fuel-efficient cars. Because of the importance of car purchases in the consumer budget this is huge news and could signal an incredibly large shift in consumer behavior.

Oil prices are likely to hit $150 a barrel this summer season, the global head of commodities research at Goldman Sachs said on Monday, as tighter supplies outweigh weakening demand.

"I would suggest that the likelihood of that happening sooner has increased tremendously ... sometime in summer," Jeffrey Currie told an oil and gas conference in the Malaysian capital, referring to oil at $150 a barrel.

Goldman Sachs, the most active investment bank in energy markets and one of the first to point to triple-digit oil more than two years ago -- a once unthinkable level -- said last month oil could shoot up to $200 within the next two years as part of a "super spike."